With more than two-thirds of the world’s poor living in rural areas, higher rural incomes are a pre-requisite for sustained poverty reduction and reduced hunger. This volume sets out a strategy for raising rural incomes which emphasises the creation of diversified rural economies with opportunities within and outside agriculture. Agricultural policies need to be integrated within an overall mix of policies and institutional reforms that facilitate, rather than impede, structural change. By investing in public goods, such as infrastructure and agricultural research, and by building effective social safety nets, governments can limit the role of less efficient policies such as price controls and input subsidies.

The chapters in this volume are concerned with the role of agricultural policies in developing countries, with a focus on their potential for raising the incomes of agricultural and rural households and thereby reducing poverty.

This study addresses the role of agricultural policies in raising incomes in developing countries. Higher incomes are essential for sustained progress on the first Millennium Development Goal (MDG1), which calls for the eradication of extreme poverty and hunger, and includes a specific target of reducing by 50% between 1990 and 2015 the proportion of people living on less than a dollar a day. The aim is to identify ways in which the appropriate set of policies may vary according to a country’s stage of development.

The importance of raising agricultural and rural incomes in developing countries is high on the political agenda, for both structural reasons and as a result of recent developments in world food markets.

This chapter examines the role of agricultural policies in raising rural incomes in developing countries. The underlying premise is that policies need to be effective given current economic structures, yet anticipate and facilitate the transition to structures that are capable of generating higher incomes. This means improving the productivity and competitiveness of smallholder farmers, who dominate developing country agriculture, while widening opportunities outside the sector as the economy diversifies. Many of the required policies are not agriculture-specific, and agricultural policies need to be framed in the broader context of rural development strategies. The primary need is for investments in public goods that can support agricultural and rural development, such as agricultural research and rural infrastructure.

In this chapter, household production and consumption data are combined with national price data to simulate the welfare effects of increases in staple prices. The focus is on the rural sectors of nine developing countries and on six types of staple crops. The results show that since most rural households are net buyers of staples, they stand to lose from higher staple prices in the short run. However, simulations of the 2007/2008 food price crisis suggest that the magnitude and timing of the welfare shocks depended heavily on the type of crops produced and consumed by each rural household. Simulations up to 2018 suggest higher future prices threatening welfare, but also creating opportunities for those who can increase staple production.

This chapter presents the Development Policy Evaluation Model (DEVPEM), a new simulation model which captures four critical aspects of rural economies in developing countries: 1) the role of the household as both a producer and a consumer of food crops; 2) high transaction costs of participating in markets; 3) market linkages among heterogeneous rural producers and consumers; 4) the imperfect convertibility of land from one use to another. The results of simulations for six country models show that no untargeted agricultural policy intervention is pro-poor within the rural economy. While agricultural policy instruments are less efficient at raising rural incomes than direct payments, the degree of inefficiency of some market interventions, notably input subsidies, is not inevitably as high as observed in developed OECD countries.

Conventional best practice advice for risk management strategies tends to focus on long-run agricultural development, trade liberalisation, the provision of safety nets and private market solutions to risk. However, if world price spikes like those observed in 2008 are an infrequent but real event, policy recommendations need to take into account the greater prevalence of market failures in many developing countries and associated underdevelopment of marketing institutions. While policy should rely on liberal trade in most years, a short-run stocks policy may be a viable option, due to delays in import arrival, imperfect information on the harvest, and inter-seasonal price dynamics. Moreover, trade policy adjustments are likely to be perceived as necessary when infrequent world price spikes reoccur. The challenge to implementing such policies lies in ensuring consistent, predictable and transparent governance so that interventions make outcomes better, not worse.

Input subsidies provide an operationally simple and politically attractive way of addressing multiple objectives. Economic objectives include stimulating production, offsetting high transport costs and input supply costs, making inputs affordable to farmers without credit, and allowing farmers to learn about the benefits of new inputs. In addition, they serve the social objective of transferring income to poor farmers. Input subsidies are an indirect, and relatively inefficient, way of addressing these objectives; they distort the allocation of resources, are prone to capture by vested interests, and often become fiscally costly. Innovative design features can mitigate some of these problems, but if input subsidies are deemed to have a short- to medium-term role it is important that their use does not crowd out spending on essential public goods, or compromise a long term approach of eliminating market failures – as opposed to offsetting them – and getting private markets working without subsidies.